Tajikistan—Letter
of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of UnderstandingNovember 13, 2002

The following item is a Letter of Intent of the government
of Tajikistan, which describes the policies that Tajikistan intends to implement
in the context of its request for financial support from the IMF. The document,
which is the property of Tajikistan, is being made available on the IMF website
by agreement with the member as a service to users of the IMF
website.

1. Over the past several years, the Government of Tajikistan
has implemented a program of economic reform with support from the IMF's Poverty
Reduction and Growth Facility (PRGF). In June 1998, a three-year PRGF arrangement
was approved in an amount equivalent to SDR 96 million (or 110 percent of quota).
In response to the Russian crisis, access was raised to SDR 100.3 million. This
arrangement expired in December 2001 with SDR 78.3 million having been disbursed.

2. Under that program, we significantly improved macroeconomic stability
through the implementation of appropriate macroeconomic policies. The implementation
of structural reform was somewhat less successful, but over the past year our
efforts in this regard have also improved. We recognize the importance of structural
reform to ensuring sustainable growth and we plan to intensify our efforts in
this area.

3. During the first half of this year, we implemented a Staff
Monitored Program (SMP) aimed at reinvigorating our commitment to economic reform.
Under the SMP, we observed nearly all of the quantitative targets and implemented
most of the structural measures. In particular, we adopted measures that enhanced
fiscal transparency; strengthened the independence of the National Bank of Tajikistan;
reduced quasi-fiscal deficits in the energy sector; and improved our debt management
capacity. We have also recently submitted our Poverty Reduction Strategy Paper
that sets out the actions we plan to take in order to reduce poverty in Tajikistan.

4. Unfortunately, effective debt management has continued to be a challenge
for us. We regret the earlier incidents of misreporting and are committed to strengthening
our institutional capacity to avoid such incidents in future. Unfortunately, under
the SMP we allowed external payment arrears to again accumulate on government-guaranteed
debt. This stemmed, in part, from confusion over the requirements for entering
into negotiations with our commercial creditor. These arrears, however, have now
been cleared.

5. Building institutions including the National Bank of Tajikistan
(NBT) is an important element of our economic strategy. We will work to strengthen
central bank independence, bolster its financial condition, and improve its operation.
In this regard, I would like to advise you that the NBT has received full repayment
for the directed credits it issued in July and August of this year.

6. Together
with the IMF missions that visited Dushanbe in April, July and October this year,
we reached understandings on an economic program. We are requesting support through
the IMF's Poverty Reduction and Growth Facility (PRGF), in an amount equivalent
to SDR 65 million (75 percent of quota). The Memorandum of Economic
and Financial Policies attached to this letter sets out the details of the economic
program covering the period October 1, 2002-September 30, 2005. The first and
second reviews under the PRGF arrangement are scheduled to take place by May 15,
2003 and November 15, 2003, respectively.

7. We have also recently submitted
our Poverty Reduction Strategy Paper that sets out the actions we plan to take
in order to reduce poverty in Tajikistan. In this regard, we would note that since
the PRSP was finalized, more recent data has become available that has led us
to revise slightly some of our projections for 2002 and the medium term. These
latter projections form the basis for our current policies and we plan to realign
the PRSP with these projections at the time of the first annual progress report.

8.
The Government believes that the policies described in the Memorandum will enhance
the prospects for achieving the objectives of our economic program for 2002. We
intend to remain in close consultation with Fund staff on the adoption of any
measures that may be appropriate, in accordance with IMF policies on such consultation,
and will provide the staff with information it requests for monitoring economic
developments and progress in the implementation of polices and in reaching the
objectives of the program supported by the PRGF arrangement. In addition, the
Government stands ready to take any further measures, in consultation with Fund
staff, on economic and financial policies that might be necessary to ensure that
the overall objectives of the program can be attained. In order to enhance transparency
of our economic policies, we request that this letter, the Memorandum of Economic
and Financial Policies, and the Staff Report be published on the Fund's website.

Very
truly yours,

/s/

Emomali RakhmonovPresident
of the Republic of Tajikistan

REPUBLIC OF TAJIKISTAN

Memorandum
of Economic and Financial Policies for the Period October 1, 2002 to September
30, 2005Supported under the Poverty Reduction and Growth Facility

I.
Introduction

1. Since 1996, the International
Monetary Fund (IMF) has supported economic reform in Tajikistan, most recently
with a three-year arrangement under the Poverty Reduction and Growth Facility
(PRGF) Trust.1 Economic reform
has been uneven due to weak institutions, the civil war and external shocks. In
the early stages of the program, this uneven implementation was reflected in an
erratic macroeconomic performance.

2. During the PRGF arrangement, we observed
many of the quantitative performance criteria but some of the structural reform
measures were not fully implemented. Fiscal policy was generally satisfactory
but monetary policy targets were frequently missed. Although external shocks complicated
monetary policy, inadequate policy instruments, a weak banking sector, and a lack
of independence hindered the operations of the National Bank of Tajikistan (NBT).
In particular, the NBT's inability to resist pressure for directed credits was
responsible for many of the missed targets and periodic surges in inflation.

3.
During the third annual arrangement, we observed more of the quantitative targets
and improved macroeconomic stability. Our progress with structural reform continued
to be uneven and we accrued external payments arrears that resulted in misreporting
to the Fund and several noncomplying disbursements. While the first and second
reviews of the third annual arrangement were completed, the third and final reviews
were not.

4. In 2001, real GDP grew 10 percent and during the first eight
months of this year increased by 8 percent. The leading sectors continue to be
agriculture (cotton and wheat) and aluminum. Inflation performance improved last
year and in early 2002, but subsequently it weakened. During the first nine months
of 2002, cumulative inflation was 10.2 percent and it will likely be higher than
we anticipated at the end of the year. Both spillover effects of strong regional
demand and another lapse in monetary policy account for this development. The
recent expansion of reserve money also contributed to a depreciation of the somoni
in the curb market, after remaining relatively stable through most of the past
18 months.

5. The current account deficit widened in 2001 because of a deterioration
in the terms of trade and a sharp decline in exports. While we received sufficient
inflows to finance our balance of payments deficit last year, future financing
may be problematic because of concerns about our heavy external debt burden. The
current account deficit is projected to decline to 4.2 percent of GDP this year
because of an increase in the volume of exports. At the end of 2001, gross international
reserves were equivalent to 1.9 months of import cover and are projected to rise
to 2¼ months by the end of this year.

6. In the context of a Staff
Monitored Program (SMP) covering January-June 2002, we continued our efforts to
achieve greater macroeconomic stability and to reconfirm our commitment to structural
reform. We observed most of the targets for key fiscal and monetary variables
for end-March and end-June 2002, and did not accumulate new wage or pension arrears.
Regrettably, external payments arrears accrued to a German commercial bank in
conjunction with our efforts to restructure that loan, however, we have now cleared
all arrears. Our fiscal performance during this time was particularly strong,
with a surplus of SM 14.8 million, compared with a projected half-year deficit.
Since the end of the SMP, our fiscal performance has remained strong. Monetary
policy, however, moved off track with reserve money exceeding its target because
of weak institutional capacity that led to unsterilized intervention in the foreign
exchange market and directed credits. The NBT has since removed this excess liquidity
and taken steps to improve policy implementation including better supervision
of liquidity management and improved coordination between departments.

7.
Under the SMP, we implemented most of the measures that constituted structural
benchmarks, although some with a delay. We introduced measures to strengthen the
independence and financial condition of the central bank; addressed weaknesses
in the banking sector; amended legislation to enhance the transparency of the
state audit agency; reduced energy sector arrears; and we developed a detailed
inventory of our external public- and publicly-guaranteed debt. In connection
with this exercise, we have written to our external creditors asking them to confirm
our understanding of our external debt obligations. In October we issued a presidential
decree regularizing financial relations between the NBT and the government including
the reconciliation of all obligations on market terms. We also issued a resolution
that eliminated the role of local government officials in planning or allocating
cotton production and cotton exports.

8. At end-2001, the total of public
and publicly guaranteed external debt was US$1,024 million, equivalent to
100 percent of GDP. We recently restructured our debts to Kazakhstan, Belarus
and Uzbekistan on significantly better terms. We have also initiated discussions
on debt restructuring with Russia in order to achieve full financing of the program
for the first year. In our view, the debt service relief offered through such
a restructuring will allow us some room to expand social programs and raise public
sector wages, in an effort to alleviate poverty.

9. Since the beginning
of this year, we have demonstrated our strong commitment to macroeconomic stabilization
and structural reform. This Memorandum of Economic and Financial Policies (MEFP)
outlines our strategy for continuing this reform and is derived from and is consistent
with the Poverty Reduction Strategy Paper (PRSP) that we submitted to the Executive
Board of the Fund in October 2002.

II. Program objectives
and policies

10. The goals of the PRSP can best be accomplished through
sustained growth, low inflation, exchange rate stability, and effective policy
implementation. For 2002-05, we project real GDP growth to be at least 5 percent
annually and inflation to decline to 5 percent by the end of the period.
These goals, together with a stable exchange rate, would lead to an improvement
in per capita incomes (in U.S. dollar terms) of about 15 percent over the next
several years.

11. An important focus of our economic program will be to
improve debt management and fiscal sustainability. We plan to limit the size of
our foreign-financed public investment program (PIP) to no more than 3 percent
of GDP and to reduce the quasi-fiscal deficit in the energy sector. The anticipated
debt restructuring with Russia will provide significant debt service relief. Taken
together, these measures will help bring about the needed adjustment in the balance
of payments. Over the period 2002-05, we expect the current-account deficit to
decline to 3.6 percent of GDP, and our gross international reserves to increase
to 3.2 months of imports.

12. Implementing restrictive fiscal and monetary
policies will be necessary to meet the program's quantitative targets (Annex
I). To improve the prospects for sustaining economic growth, we will implement
key structural reform measures (Annex II). To demonstrate
our ownership of the new program we will implement a number of prior actions before
the scheduled Executive Board meeting on December 11, 2002 (Annex
III).

A. Fiscal Policy

13. We have improved
our fiscal discipline and reduced the overall budget deficit to ¼ percent
of GDP (excluding the foreign-financed PIP) this year from 3 percent in 1999.
This reflects our success in controlling current public expenditures and increasing
tax revenue collections. Over the period 2002-05, we project only a modest increase
in current expenditures to 15 percent of GDP reflecting our desire to maintain
tight fiscal control. This increase in spending will be financed by increased
tax revenues resulting mainly from better tax and customs administration (see
below).

14. We have reduced our medium-term public-investment project (PIP)
plans and the associated foreign financing requirement in recognition of our high
external debt, limited absorptive capacity, and the implications for recurrent
costs in the budget (for operation and maintenance). The PIP is projected to be
no more than 3 percent of GDP annually for the program period. If we can
further strengthen our revenue collection and institutional capacity, we will
(in consultation with Fund staff) reassess the size of the PIP at a future date.

15. During the remainder of 2002, we expect to achieve a small improvement
over the fiscal parameters contained in the Staff Monitored Program. Instead of
an overall fiscal deficit of 1 percent of GDP (excluding the PIP), we expect a
deficit of ¼ percent of GDP for 2002. If there is an over-performance on
tax revenues, we will allocate this toward further social spending to alleviate
poverty, while maintaining the overall deficit target.

16. In accordance
with understandings contained in the SMP, we increased civil service wages by
40 percent effective January 1, 2002. Due to savings from attrition and the reduction
of bonus payments, however, the wage bill is projected to increase by only 25 percent
this year. Although this increase is significant, it is necessary given the serious
erosion in public sector real wages in recent years. (The majority of public sector
employees live below the poverty line.) The 2002 budget allocated SM 110 million
for wages, but under the SMP we reached understandings that SM 103 million
would be sufficient given anticipated vacancies. We now estimate, however, that
SM 105 million will be required to finance the wage bill because attrition was
slightly less than anticipated.

17. For 2003, we plan to increase civil
service wages by 20 percent beginning April 1, thereby increasing the total wage
bill for the 2003 budget by 15 percent to SM 120 million. Expenditure on pensions,
stipends and benefits will be increased accordingly. By end-June 2003, we will
establish a public sector payroll database and a monitoring system for vacancies
that will improve control over the wage bill. In addition, we will finalize a
timetable for rationalizing the civil service by end-March 2003. In June 2003,
we will, in consultation with Fund staff, re-assess the prospects for a further
increase in public sector wages based on achieving our tax revenue targets and
reducing civil service employment.

18. As for social sector spending, the
2002 budget allowed for a small increase compared with 2001. This reflects higher
education outlays and transfers to households including social security and pensions.
By the end of this year, the Ministry of Finance will develop a detailed classification
of budgetary expenditures to allow for better monitoring of expenditures. During
the program period, we will also ensure the timely payment of pensions, wages,
and transfers at all levels of government. As such, maintaining a zero ceiling
on pension and wage arrears will constitute a quantitative performance criteria
in our program that will be monitored on a continuous basis.

19. The successful
execution of our fiscal policy will depend on our ability to improve revenue collection.
In the 2002 budget, we plan to increase tax revenue collection to 15.4 percent
of GDP. Because we are not ready to introduce a VAT on cotton, we will not implement
the planned reduction of the sales tax on cotton and instead will maintain this
tax at 10 percent through the end of 2003, at which time we will assess the prospects
for moving to a VAT.

20. Recently we created a Ministry of State Revenues
and Duties (MSRD) to improve tax and customs administration. We have also simplified
the income tax rate structure and broadened the tax base, and increased the rates
on excise taxes (for example, alcohol and tobacco). (By the end of the year, we
will, however, unify the excise tax on domestic and imported alcohol.) Parliament
has authorized the government to introduce a pilot unified agricultural tax in
several regions, and we will introduce this initiative from January 1, 2003. Taken
together, these measures should help to ensure that our tax revenue target for
this year is met.

21. We will continue to improve tax and customs administration,
using the guidance provided by recent Fund technical assistance. We will establish
by end-November 2002 a modernization office within the MSRD that will coordinate
and oversee implementation of reform. Our main priorities are to restructure the
ministry, reform and simplify the tax code, and to strengthen the large taxpayer
inspectorate. We plan to request further Fund assistance in pursuing these measures
so that we can complete this strategy by the end of this year.

22. In the
meantime, we will continue to make incremental improvements in tax administration,
by expanding the number of taxpayers under the jurisdiction of the large taxpayer
inspectorate based on a number of criteria; appointing a commission (with participation
of government officials and the private sector) with a mandate to simplify the
tax code (end-November 2002); and encouraging strong tax collections through the
introduction of a performance-based remuneration scheme. As an interim measure,
we will include a provision in the 2003 budget law that allows the MSRD to retain
20 percent of tax revenues derived from undeclared revenues discovered during
the course of audits by the ministry.

23. An important priority for the
government is to raise the efficiency and return on capital expenditures, especially
those related to the foreign-financed PIP. For 2002, we have limited foreign-financed
PIP expenditures to US$30 million (3 percent of GDP) although our investment requirements
are significantly larger than this amount at present. PIP expenditures are limited
by our capacity to: (i) absorb investment funds; (ii) provide counterpart funds
for projects; (iii) finance future operation and maintenance costs associated
with these investments; and (iv) to prioritize projects to reflect our required
(social) rate of return. To enhance the transparency of public spending on the
PIP and its impact on both the budget and external debt, we will incorporate fully
such spending into the 2003 and subsequent budgets. In addition, we will improve
the monitoring of PIP expenditures, through the establishment of a PIP unit within
the Ministry of Finance by end-March 2003. This unit will be responsible for tracking
such expenditures, and for developing criteria on which to judge the costs and
benefits of current and proposed projects. To further improve fiscal management,
we will also include all extra-budgetary revenues and expenditures of budget entities
in the government's quarterly budget plans. To facilitate the reconciliation of
discrepancies between the treasury and the NBT we will develop a bank reconciliation
form by end-December 2002.

B. Monetary and Exchange Rate
Policies

24. The success of our program depends heavily on the ability
of the NBT to maintain a disciplined monetary policy to reduce inflation. This
can only be accomplished if the central bank acts responsibly and is independent.
During thesecond half of this year, we expect a modest increase in money
demand. The central bank has targeted reserve money growth of 9.3 percent
during July-December 2002. Given the greater confidence in the banking system
and the local currency, we anticipate a further decline in the velocity of broad
money and an increase in the money multiplier during 2003, such that reserve money
is projected to increase by 11.8 percent. Net domestic assets of the NBT are programmed
to be SM 97.8 million at end-December 2002. We expect our net international
reserves (NIR) to improve substantially and to reach US$41.2 million by the end
of 2003.

25. In order to encourage a more efficient distribution of credit
between banks, the NBT will introduce and supervise an interbank credit market
by end-November 2002. NBT intervention in this market on a trial basis will begin
in December 2002. To ensure equitable treatment of all banks, the NBT will revise
the reserve requirement regulation such that all deposits are subject to reserve
requirements with the exception of government deposits and foreign liabilities
by end-November 2002.

26. The loan collection agency of the NBT (ALCO)
was reestablished as a department within the central bank with responsibility
for collecting loans on behalf of the NBT. It will attempt to collect the outstanding
stock of overdue private sector loans, currently totaling SM 151.7 million,
by end-June 2003. To help this effort, the government will form a working group
by end-November 2002 to examine the asset portfolio of ALCO and develop proposals
for terminating ALCO's operation by end-June 2003. The working group will have
representatives from MOF, the NBT and other government agencies as appropriate.
The assets in the portfolio will be assessed in terms of the likelihood of repayment.
Further, the working group will make proposals as to the guarantor of the loan.
There will also be an audit of ALCO to ascertain its assets. In light of the decision
to close ALCO, the NBT will (by end-November 2002) repay the charter capital that
was paid into ALCO by commercial banks.

27. The NBT will maintain a managed
floating exchange rate regime. In the event of unexpected private capital inflows,
the central bank will accumulate reserves beyond the program targets. In the case
of unexpected outflows, the central bank could allow a depreciation of the somoni.
In order to comply with the obligations under Article VIII, Sections 2, 3 and
4, of the Fund's Articles of Agreement, we will work with Fund staff to remove
all restrictions that are identified on payments and transfers for current international
transactions.

28. Recognizing the importance of central bank independence
in October we issued a presidential decree that (i) eliminates the requirement
that the NBT refund or transfer any part of the difference between interest payments
due to the NBT on bonds and securities issued by the government and interest payments
due to the government on deposits at the NBT, and (ii) requires that market
interest be paid on all government deposits at the NBT and all obligations of
the government held by the NBT. In order to improve the efficiency of the NBT,
we will finalize a plan for rationalizing operations by end-December 2002. This
rationalization will be completed by end-March 2003. We will, however, reduce
staff by 10 percent by end-December 2002 and another 10 percent by end-June
2003. We will close two branches of the NBT by end-March 2003. We also plan
to improve the efficiency of monetary operations by centralizing all accounting
functions in a single department by end-March 2003.

29. Further, the NBT
will continue to be prohibited from issuing directed credits or other forms of
preferential access to credit. This prohibition will be a continuous structural
performance criterion under our program. It will ensure that market interest rates
are paid on all NBT credit transactions, including credit auctions and sales of
NBT bills. In line with the Fund's Safeguard Assessment of the NBT, a further
continuous structural performance criterion will be established to ensure that
the NBT does not engage in any activities or expenditures that are unrelated to
its core business activities or pay dividends while it has negative net worth.
We will ensure that the NBT completes (by end-December 2002) an unqualified external
audit of its financial statements for the financial year ending April 30, 2002
in accordance with international accounting standards. We will also put in place
a mechanism to reconcile reserves data by external audit semi-annually (during
the interim and final audits) and by the Internal Audit Department on a regular
basis.

C. External Policies and Debt Management

30.
We are committed to maintaining a liberalized trade and investment regime. We
do not impose any non-tariff barriers to trade and we further reduced average
import tariffs as of May 1, 2002. We recently reduced the number of tariff-exempt
goods but continue to exempt humanitarian aid and goods imported by international
organizations, from tariffs. We have also applied for accession to the World Trade
Organization and are receiving technical assistance to facilitate our membership.

31.
During the program period under the PRGF arrangement, neither the government nor
the NBT will, without Fund approval, introduce new or intensify existing restrictions
on the making of payments and transfers for current international transactions.
Nor will we introduce or modify any multiple currency practices, conclude any
bilateral payments agreements that are inconsistent with Article VIII of the Fund's
Articles of Agreement or impose or intensify restrictions for balance of payments
reasons.

32. Our heavy external debt burden poses a threat to economic stability.
Consequently, we will pursue further fiscal consolidation and limit all foreign
borrowing. To better manage our external debt, we will adhere strictly to the
law that vests sole authority to undertake and guarantee external loans in the
MOF. Further, we will not draw on any outstanding non-concessional credit facilities.
In particular, we will advise the Iranian authorities that no further borrowing
under their export financing facility will be made unless the terms of the facility
are renegotiated on concessional terms. To improve the transparency of our external
obligations, the government will submit quarterly reports to parliament on its
external debt situation, including debt service obligations and accumulated arrears.

33.
We continue to strengthen our debt management capacity and have completed a detailed
inventory of the status, terms, source and size of our external stock of government
and government-guaranteed debt. This inventory also includes the debt of state-owned
enterprises. We have written to all of our bilateral external creditors to confirm
the details and status of our external obligations. We will update the information
contained in this inventory on a quarterly basis, so that concerns about the timely
reporting and servicing of our external debt obligations can be minimized. The
Swiss authorities, in collaboration with the IMF have agreed to finance technical
assistance, training, and equipment to further strengthen our debt management
capacity in the Ministry of Finance beginning in November 2002.

D.
Structural Reform

34. There are numerous structural reform measures
that need to be implemented to achieve sustainable economic growth. Foremost among
these are weaknesses in the banking sector, distortions in the energy sector,
government interference in the agricultural sector; and weak governance.

35.
To prevent weak banks from eroding the growing but fragile confidence in the banking
sector, we have introduced several measures. We have developed a strategy for
restructuring Amonatbank. By end-December 2002, the budget will contribute SM
575,000 to Amonatbank's capital stock and the bank will be allowed to resume limited
lending operations (25 percent of eligible loanable funds can be invested in non-government
assets) beginning November 1, 2002. The budget law for 2003 will require that
all government agencies using the services of Amonatbank pay fees for these services
beginning January 1, 2003. At that time, Amonatbank will also begin to pay interest
on all government deposits. The 2003 budget will contribute SM 1 million to the
capital of Amonatbank. Further, we will waive the minimum capital requirement
until end-June 2003 for Amonatbank because it is still operating under a restructuring
agreement. We plan to divide Agroinvestbank (AIB) in two; i) a non-bank financial
institution that concentrates on cotton financing and (ii) a commercial bank that
fully satisfies all prudential requirements. This may include recapitalization
of the bank by issuing long-term government bonds for a portion of the loans in
the bank's portfolio. We will submit a plan that includes these elements to Fund
staff by end-November 2002.

36. In order to prevent the emergence of new
problem banks in the future, we will enforce all prudential requirements for all
banks by end-March 2003. Banks that are not being restructured and do not fulfill
the prudential requirements by end-March 2003 will be closed or merged by end-September
2003. We will increase the minimum capital requirement from US$1.5 million to
US$2 million by end-December 2003 but make special provision for smaller banks
that meet the other prudential requirements. Waivers to the liquidity requirements
will be removed and the liquidity requirement on all deposits will be reduced
from 75 percent to 35 percent for those banks that meet the prudential requirements
during the preceding six months. Enforcement of prudential requirements will
be strengthened by on-site inspections of at least 4 banks by end-March 2003.

37. Over the next three years, we will pursue a comprehensive energy sector
reform with a view toward eliminating quasi-fiscal activities. We are working
closely with the Asian Development Bank in the electricity sector to improve collection
rates, raise tariffs to cost recovery levels, and provide the state-owned enterprise
(Barki Tajik) with funding for upgrading its capital equipment and management
restructuring. We plan to move quickly to improve the financial prospects of the
other state-owned enterprises in the energy sector. We will improve payment discipline
by ensuring that Naftrason does not accrue any new arrears.

38. Beginning
in December 2002, we will adjust all utility tariffs on a quarterly basis to account
for changes in the nominal exchange rate. We will increase gas tariffs in order
to reflect 80 percent of the cost of importing and distributing gas. By end-March
2003, we will increase gas tariffs to 100 percent of the cost of importing and
distributing gas. Specifically, by end-December 2002 (structural performance criterion)
we will introduce a uniform gas tariff of SM 140 per thousand cubic meters and
to SM 175 per thousand cubic meters by end-March 2003. We will also unify all
tariffs for industry, services, budgetary organizations and agriculture.

39.
We will move aggressively to raise collection rates among consumers of gas. As
of end-September 2002, Tajikgas had increased its collection rates to 30 percent
for households and to 100 percent for all other categories of gas users, where
the collection rate is defined as percent of payments not more than 60 days overdue.
Collection rates for households will be increased further to 60 percent by end-June
2003 (structural performance criterion), 75 percent by end-December 2003,
and 90 percent by end-June 2004.

40. To reduce the social impact of
energy sector reforms, we will prepare a plan in consultation with Fund staff
by end-November 2002 for mitigating the effects of higher energy tariffs on low-income
households. This plan will include a timetable for the mandatory installation
of gas meters in all households and enterprises. The 2003 budget law will provide
SM 12 million for the compensation mechanism. In this regard, we will complete
preparation of a compensation scheme that will take effect January 1, 2003 that
is targeted to low-income households. Given our intention to focus compensation
on all low-income households, we will eliminate all other privileged categories
of consumers of electricity, gas and heat by end-December 2003.

41. A critical
element of our structural reform program is focused on increasing private sector
activity in agriculture in order to improve productivity and reduce poverty. We
plan to privatize the remaining 225 state-owned farms by the end of 2005 through
the issuance of land use and land share certificates. During the period July-December
2002, we will restructure 40 large state farms and issue the corresponding land
use and land share certificates. During 2003, we will restructure 75 large state
owned farms and issue the corresponding land use and land share certificates.

42.
Public sector intervention in the agricultural sector remains an obstacle to productivity
gains and to attracting private investors to the sector, especially with regard
to cotton. We will continue to impress on local authorities that they cannot interfere
with financing, production, and pricing decisions of any farm. We have reinforced
this message by issuing a presidential decree on September 25, 2002 that abolishes
"cotton balances" as a tool for planning or allocating cotton production
and export proceeds and that effective immediately, cotton financing and export
contracts need to be vetted and registered with only the Cotton Exchange. The
same resolution abolished the monopoly of the Agroinvestbank in granting "deal
passports" as export authorization and indicate that such authorization will
be issued only by the commercial bank responsible for financing the inputs of
the particular exporter.

43. Agriculture, and in particular the cotton sector,
debts have grown to an unsustainable level. While the government cannot assume
financial responsibility for all of these debts, the level of debt has become
an impediment to farm restructuring and privatization. To eliminate the current
moral hazard problem, a government resolution clarifying that the debts of state
farms are to be passed on to the dekhan farms in proportion to their land share
in the former state farm will be issued no later than end-November 2002. A mechanism
for dealing with the debts of state farms that are too large to be assumed by
any potential private farmers will be submitted for government consideration no
later than end-December 2002.

44. Over the course of our program, we will
also work to improve economic governance by reducing excessive government intervention
in economic affairs, enhancing transparency, accountability and economic management,
and by further establishing a stable, rule-based competitive environment. A number
of measures we plan to adopt address these issues, for example, including the
PIP and extra-budgetary revenues and expenditures in future budgets; strengthening
the independence of the central bank and supervision of commercial banks; and
addressing quasi-fiscal activities in the energy sector. These measures will reduce
economic distortions and the potential for corruption, and thus lead to more efficient
resource allocation.

45. An important element in our effort to improve governance
is the state audit agency that we created last year. The agency's role is to monitor
all government and commercial entities to ensure that any public resources they
receive are not misappropriated. The agency is now fully operational, however,
it is too early to assess its impact. We are developing a program of audits for
the agency and we will consult with Fund staff on the agency's audit priorities
to make sure it is effective in fulfilling its intended role. In this regard,
we will give high priority to overseeing the activities of regional and local
authorities.

III. Program Monitoring

46. The
PRGF arrangement is anticipated to support the program for the three-year period
October 1, 2002-September 30, 2005, with the first year extending over the period
October 1, 2002-September 30, 2003. The first year of the arrangement will
be monitored through two reviews by the Fund's Executive Board based on semi-annual
performance criteria (for end-March 2003 and end-September 2003), structural
performance criteria, indicative targets, and structural benchmarks.

47.
Quantitative performance criteria and indicative targets for the first year program
are specified in Annex I. The quantitative performance criteria
are: a floor on net international reserves of the NBT; a ceiling on net domestic
assets of the NBT; a ceiling on net credit by the banking system to the government;
a ceiling on the cumulative overall fiscal deficit of the general government,
excluding the foreign financed public investment program; a floor on cumulative
tax collections of the Ministry of State Revenues and Duties; a zero ceiling on
the contracting or guaranteeing of new short-term nonconcessional external debt
with original maturity of up to and including one year; and a zero ceiling on
the contracting or guaranteeing of new medium- and long-term nonconcessional external
debt with original maturity of more than one year. No new wage and non-working
pensioners' pension payments arrears and no new external payments arrears (except
for arrears that are subject to debt-rescheduling negotiations) shall be accumulated
(monitored on a continuous basis). Detailed definitions and reporting requirements
for these performance criteria are contained in the Technical Memorandum of Understanding
attached to this memorandum. In addition, the program includes adjustors on net
domestic assets of the NBT; net international reserves; net credit by the banking
system to the government; and the overall fiscal deficit (excluding PIP) to reflect
excess/shortfalls of the disbursement of (non-project) foreign loans and cash
grants, privatization receipts, and any overdue or rescheduled debt service obligations.
The structural performance criteria are detailed in Annex II.

48.
The first review of the program is scheduled to take place on or after May 15,
2003, based on performance as of March 31, 2003, and the second review is scheduled
for November 15, 2003, based on performance as of September 30, 2003. At the time
of the first review, those quantitative and structural performance criteria for
September 30, 2003, as well as structural benchmarks, may be revised in light
of developments.

49. The government and the National Bank of Tajikistan
believe that the policies described herein will further strengthen our macroeconomic
stabilization and structural reform efforts, and that they are adequate to achieve
the objectives of our economic program. We intend to remain in close consultation
with the IMF in accordance with IMF policies on such consultation and will provide
the IMF with information it requests for monitoring economic developments and
implementation of policies under the program. In addition, the government and
the NBT stand ready to take further measures, in consultation with the IMF staff,
which might be necessary to ensure that the overall objectives of the program
can be achieved.

50. To promote transparency, we hereby request that the
letter of transmittal, and the Memorandum of Economic and Financial Policies be
published on the IMF website.

ANNEX I

Tajikistan: Quantitative
Performance Criteria for the First Annual Program Under the Proposed PRGF
Arrangement, October 2002–September 2003(In stocks; unless otherwise
indicated)

2002

2003

End-Dec.

End-Mar.

End-Jun.

End-Sep.

Indicativetargets

Performancecriteria

Indicativetargets

Performancecriteria

(In millions of
somoni)

1.

Ceiling
on net domestic assets of the NBT

97.8

87.7

91.5

55.5

2.

Ceiling on net credit of the banking system to general government

-75.6

-81.3

-78.5

-113.8

3.

Ceiling
on the cumulative overall fiscal deficit of the general government1,2(excluding
foreign-financed public investment program)

-25.8

-24.2

-31.1

-37.5

4.

Ceiling
on general government wage, and nonworking pensioners' pension arrears3

0.0

0.0

0.0

0.0

5.

Floor
on tax collection of the Ministry of State Revenues and Duties1

93.3

191.3

302.6

401.0

(In
millions of U.S. dollars)

6.

Floor on total net international
reserves

22.4

26.0

27.3

42.4

7a.

Ceiling
on the net disbursement of short-term external debt with original maturity of
up to and including one year4

0.0

0.0

0.0

0.0

7b.

Ceiling
on the contracting or guaranteeing of medium and long-termnonconcessional external
debt with original maturity of more than one year4

0.0

0.0

0.0

0.0

8.

New
external payments arrears3

0.0

0.0

0.0

0.0

(In
millions of somoni)

Indicative target:

Reserve money

165.1

165.9

173.2

182.6

Memorandum items:

Program exchange rate (SM/US$)

3.0

3.0

3.0

3.0

Disbursements of balance of payment
support (in millions of U.S. dollars)5

26.7

0.0

0.0

12.5

Sources: Tajik authorities;
and Fund staff estimates.1Cumulative from October 1, 2002.2On a cash basis, the ceiling will be adjusted downward by 100 percent
for any rescheduled interest payments and for any accumulation of arrears.3A continuous performance criterion.4By the government,
NBT or any other agency acting on behalf of the government as defined in the Technical
Memorandum.5Disbursements in Q4 2002 and Q3 2003 are expected
from the World Bank and the European Union.

ANNEX
II

Tajikistan: Structural Performance Criteria and Benchmarks
for the First Annual Program Under the Proposed PRGF Arrangement, October
2002-September 2003

Structural Performance Criteria

Continuous:
Prohibit the National Bank of Tajikistan (NBT) from issuing directed credit.

Continuous:
Prohibit the NBT from making expenditures not related to its core business activities
or paying dividends while it has negative net worth.

By end-December
2002, the government will introduce a uniform gas tariff of SM 140 per thousand
cubic meters.

By end-June 2003, increase the collection rates
of Tajikgas so that on average 60 percent of all households pay for the gas
they receive.

Structural Benchmarks

By end-December
2002, the NBT will finalize an inventory of all guarantees, pledges, and other
NBT contingencies under the control of the Head of the Accounting Department with
required inputs from all areas of the NBT.

By end-December 2002,
the government will finalize a plan for mitigating the effects of higher energy
tariffs on low-income households and ensure that the 2003 budget provides adequate
resources for implementing the plan.

By end-December 2002, the
government will implement automatic quarterly adjustments of all utility tariffs
to account for changes in the nominal exchange rate.

By end-March
2003, the government will finalize a timetable for downsizing the civil service.

By end-September 2003, close or merge all banks that are not being
restructured and do not fulfill the prudential requirements as of end-March 2003.

Submit
to parliament a draft budget for 2003 that is consistent with the parameters and
main macroeconomic framework as discussed with Fund staff.

Initiate
debt restructuring discussions with Russia to achieve full financing of the program
for the first year.

Ensure that all external payments arrears are
cleared, in particular, those pertaining to two government-guaranteed loans from
two German banks.

Complete the regularization of financial relations
between the NBT and the government by issuing a government resolution that will
convert outstanding private sector credits held by the NBT into domestic government
debt.

Issue a presidential decree that will prohibit intervention
of local authorities in the financing, production, and pricing decisions of cotton
farmers and cotton producers. In particular, we will abolish the use of "cotton
balances" that allocate cotton production and cotton export proceeds.

1The
Executive Board of the IMF approved the arrangement in June 1998, with access
of SDR 96 million. Access was raised to SDR 100.3 million (115 percent
of quota) in December 1998. The arrangement expired on December 24, 2001
with total disbursements of SDR 78.3 million having been made.

REPUBLIC OF TAJIKISTAN

Technical
Memorandum of Understanding for the PRGF Arrangement 2002–2005

1.
This memorandum defines variables that constitute quantitative performance criteria
and indicative targets under the Poverty Reduction and Growth Facility Arrangement
(PRGF), and sets out the reporting requirements for the authorities and the National
Bank of Tajikistan (NBT).1

I.
Quarterly Targets

A. Fiscal Deficit of the General
Government

Table 1. Ceiling on the Cumulative
Overall Deficit of the General Government

(In
millions of somoni)

Cumulative deficit from October 1, 2002 to:

December 31, 2002 (indicative
target)

-25.8

March
31, 2003

-24.2

June 30, 2003 (indicative target)

-31.1

September 30,
2003

-37.5

Definitions

2.
The general government budget is defined to include the republican budget,
local (including municipal) budgets, and all extra-budgetary funds at all levels
of general government, including the social protection fund (SPF) but excluding
the externally financed public investment program. The overall cash deficit
of the general government is defined from the financing side as the sum of the
following:

(i) The change in net claims (transactions) of the NBT
on the general government which includes all deposits of the general government
with the NBT, counterpart deposits (which reflect balance of payment and/or general
budget support from IFIs and other donors), NBT loans and advances to the general
government, NBT holdings of government securities, bank restructuring costs, and
the privatization account (where proceeds from the privatization of state property
are held);

(ii) The change in net claims (transactions) on the general
government of the rest of the domestic banking system which are defined to include
the net position of the general government with respect to other domestic commercial
bank assets (loans, overdrafts, cash advances, holdings of treasury bills or other
securities) and liabilities (deposits, etc.);

(iii) The change in net claims
(transactions) on the general government of domestic nonbank institutions and
households is defined to include net sales of treasury bills, bonds or other government
securities to nonbank institutions and households (including nonresidents and
nonresident financial institutions), plus any other increase in liabilities of
the general government to domestic nonbank institutions or households. Included
in this item are also compensation payments (-) to Tajik Rail for its servicing
of external debt to Uzbekistan;

(iv) Gross proceeds from the privatization
of state property, which are kept in a separate account with the NBT, are defined
as all receipts originating from the sale of state property; and

(v) Net
foreign financing of the general government which is defined as the difference
between gross disbursements of foreign financing and amortization of government
debt to foreign financial and nonfinancial institutions.

3. The
augmented deficit of the general government is defined from the financing side
as the sum of the same items as in the definition of the overall cash deficit
of the general government plus the counterparts (-) to increases in net credits
or net claims on the general government from the NBT or commercial banks as a
result of the resolution of the bad loans problem under the bank restructuring
program. These counterparts consist of the full value of the loans taken over
by the government.

4. Monthly data on net claims of the domestic banking
system on the general government are taken from the balance sheets of the NBT
and commercial banks. The Ministry of Finance shall provide information on, and
confirm the amounts of general government deposits held abroad, disbursements
of foreign loans to the general government, net sales of treasury bills and other
securities, borrowing from the nonbank sector, as well as gross receipts and expenditures
of the central government privatization account. It shall provide detailed monthly
data on: (i) revenues, expenditures and lending operations of the state and local
budgets, as well as all budgetary and extra-budgetary funds; (ii) quasi-fiscal
operations; (iii) estimates of the outstanding stock of wage and pension
and all other domestic expenditure arrears; and (iv) estimates of the outstanding
stock of tax and other revenue arrears to the general government.

Adjustors

5.
The ceiling on the cumulative overall fiscal deficit will be adjusted downward
by 100 percent for any overdue or rescheduled interest obligations.

B.
Tax Collection of the Ministry of State Revenues and Duties

Table 2. Floor
on the Tax Collection of the Ministry of State Revenues and Duties

(In millions of
somoni)

Cumulative revenues from October
1, 2002 to:

December
31, 2002 (indicative target)

93.3

March 31, 2003

191.3

June 30, 2003 (indicative
target)

302.6

September
30, 2003

401.0

Definitions

6.
Tax collection include all taxes collected by the Ministry of State Revenues
and Duties. With regard to internal taxation excluded from the definition is:
any tax offsets or in-kind payments, sales taxes on cotton and aluminum exports,
taxes, charges, and fees collected by the Social Protection Fund, and any proceeds
from loans, or other banking system credits, the issuance of securities, or from
the sale of state assets. With regard to foreign taxes, custom revenues are defined
to include import duties, export duties and taxes, customs duties, exchange taxes,
and other taxes (including VAT) on international trade and transactions.

C.
Limits on the Stock of Net Domestic Assets of the NBT

Table
3. Ceiling on the Stock of Net Domestic Assets of the NBT

(In millions of somoni)

December
31, 2002 (indicative target)

97.8

March 31, 2003

87.7

June 30, 2003 (indicative target)

91.5

September 30, 2003

55.5

Definitions

7.
Net domestic assets of the NBT are defined as: reserve moneyminusnet foreign assetsof the NBT. Reserve money is composed of currency
in circulation, required reserves, other bank reserves, and deposits of non-government
non-banks with the NBT. Net foreign assets of the NBT includes net international
reserves in convertible currencies. The NBT's net domestic assets comprises the
following assets and liabilities: net credit to the general government, claims
on banks, credit to the economy, and other items net (OIN). OIN includes, the
foreign exchange re-valuation and capital accounts of the NBT.

8. The NDA
ceiling should be also adjusted for changes in reserve requirements, in accordance
with the following formula:

∆NDA = ∆rBο
+ rοΔB + ΔrΔB

where rο
denotes the reserve requirement ratio prior to any change; Bο
denotes the programmed level of the reservable base money in the period
prior to any change; ∆r is the change in the reserve requirement ratio;
and ΔB denotes the immediate change in the reservable base with respect to
the programmed base money level as a result of changes in the definition.

Adjustors

9.
The ceiling on net domestic assets of the NBT will be adjusted: (i) downward/upward
by 100 percent for excesses/shortfalls of the disbursement of (non-project) foreign
loans and cash grants; (ii) downward/upward by 100 percent for the excesses/shortfalls
of privatization receipts; and (iii) downward by 100 percent for any overdue or
rescheduled debt service obligations.

Table
4. Ceiling on Net Credit of the Banking System to General Government

(In
millions of somoni)

December 31, 2002 (indicative target)

-75.6

March 31, 2003

-81.3

June 30, 2003 (indicative target)

-78.5

September 30, 2003

-113.8

Definitions

10.
Net credit of the banking system to the general government is the sum of net credit
from the NBT to general government and net credit from the rest of the domestic
banking system to general government, both as defined in section A above.

Adjustors

11.
The ceiling on net credit of the banking system to general government will be
adjusted: (i) downward/upward by 100 percent for excesses/shortfalls of the disbursement
of (non-project) foreign loans and cash grants; (ii) downward/upward by 100 percent
for the excesses/shortfalls of privatization receipts; and (iii) downward by 100
percent for any overdue or rescheduled debt service obligations.

E.
Net International Reserves

Table 5. Floor under the Stock of Net International
Reserves of the NBT in Convertible Currencies(In millions of U.S.
dollars)

December
31, 2002 (indicative target)

22.4

March 31, 2003

26.0

June 30, 2003 (indicative target)

27.3

September 30, 2003

42.4

Definitions

12.
Total net international reserves of the NBT are defined as the difference
between total gross international reserves of the NBT and total reserve liabilities
of the NBT. Total gross international reserves of the NBT are defined as
the NBT's holdings of monetary gold, holdings of SDRs, any reserve position in
the IMF, holdings of convertible currencies in cash or in nonresident banks that
are readily available. Also included are holdings of foreign currency-denominated
securities issued by governments or central banks of OECD member states. Excluded
are capital subscriptions in foreign financial institutions, non-liquid assets
of the NBT, convertible currency denominated claims on domestic banks and other
residents, assets in non-convertible currencies, foreign assets pledged as collateral
or otherwise encumbered and the net forward position, if any (defined as the difference
between the face value of foreign currency denominated NBT off balance sheet claims
on nonresidents and foreign currency obligations to both residents and non-residents).
Reserve liabilities of the NBT are defined as outstanding IMF credit, and
liabilities of the NBT to nonresidents with an original maturity of up to and
including one year.

13. For the purpose of program monitoring, U.S. dollar
denominated components of the balance sheet will be valued at the program exchange
rate, and other foreign currency denominated items will be valued at cross rates
between the program exchange rate of the U.S. dollar and current official exchange
rates of the U.S. dollar against those currencies. Official gold holdings shall
be valued at US$320.0 per troy ounce.

14. Fund staff will be informed of
details of any gold sales, purchases, or swap operations during the program period,
and any resulting changes in the level of gross foreign reserves that arise from
revaluation of gold will be excluded from gross reserves (as measured herein).

Adjustors

15.
The floor on net international reserves of the NBT will be adjusted: (i) upward/downward
by 100 percent for excesses/shortfalls of the disbursement of (non-project) foreign
loans and cash grants; (ii) upward/downward by 100 percent for the excesses/shortfalls
of privatization receipts in foreign exchange; and (iii) upward by 100 percent
for any overdue or rescheduled debt service obligations.

F.
Limits on Short-, Medium-, and Long-Term External Debt

Table 6. Cumulative Ceiling on the
Contracting and Guaranteeing of External Debt

0-1
Year Maturity

Over 1 Year Maturity

During
the period from end-September 2002 to:

December 31, 2002 (indicative target)

0

0

March 31, 2003

0

0

June 30, 2003 (indicative target)

0

0

September 30, 2003

0

0

Definitions

16.
The external debt limits (short-, medium- and long-term) apply to the government
of Tajikistan, the National Bank of Tajikistan and any other agency acting on
behalf of the government. For short, medium- and long-term external debt, the
performance criterion applies not only to debt as defined in point No. 9 of the
Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No.
12274-(00/85), adopted August 24, 2000), but also to commitments contracted or
guaranteed for which value has not been received.

17. The definition of
debt set forth in point No. 9 of the guidelines reads as follows: "(a) For
the purposes of this guideline, the term "debt" will be understood to
mean a current, i.e., not contingent, liability, created under a contractual arrangement
through the provision of value in the form of assets (including currency) or services,
and which requires the obligor to make one or more payments in the form of assets
(including currency) or services, at some future points in time; these payments
will discharge the principal and/or interest liabilities under the contract. Debts
can take a number of forms, the primary ones being as follows: (i) loans,
i.e., advances of money to obligor by the lender made on the basis of an undertaking
that the obligor will repay the funds in the future (including deposits, bonds,
debentures, commercial loans, and buyers' credits) and temporary exchanges of
assets that are equivalent to fully collateralized loans under which the obligor
is required to repay the funds and usually pay interest, by repurchasing the collateral
from the buyer in the future (such as repurchase agreements and official swap
arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits
the obligor to defer payments until some time after the date on which the goods
are delivered or services are provided; and (iii) leases, i.e., arrangements under
which property is provided which the lessee has the right to use one or more specified
period(s) of time that are usually shorter than the total expected service life
of the property, while the lessor retains the title to the property. For the purpose
of the guideline, the debt is the present value (at the inception of the lease)
of all lease payments expected to be made during the period of the agreement excluding
those payments that cover the operation, repair or maintenance of the property.
(b) Under the definition of debt set out in point 9(a) above, arrears, penalties,
and judicially awarded damages arising from the failure to make payment under
a contractual obligation that constitutes debt are debt. Failure to make payment
on an obligation that is not considered debt under this definition (e.g., payment
on delivery) will not give rise to debt."

18. External debt limits
apply to the contracting or guaranteeing of new nonconcessional short term
external debt (with an original maturity of up to and including one year),
and to the contracting or guaranteeing of new nonconcessional medium- and long-term
external debt (with original maturities of more than one year).

19.
Excluded from the external debt limits are loans contracted for the purpose of
debt rescheduling or refinancing if the terms of the new loan are more favorable.
IMF credit is excluded from the external debt limits. The performance criterion
on new nonconcessional short-term external debt will not apply to loans classified
as international reserve liabilities of the NBT (liabilities of the NBT to nonresidents
with an original maturity of up to and including one year). Normal import-related
financing is excluded from the performance criterion on new short-term external
debt.

20. Debt falling within the external debt limits that are denominated
in currencies other than the U.S. dollar shall be valued in U.S. dollars at the
exchange rate prevailing at the time of contracting or guaranteeing takes place
or at the exchange rate stipulated in the contract.

21. For the purposes
of the program, the guarantee of a debt arises from any explicit legal obligation
of the government or the NBT or any other agency acting on behalf of the government
to service such a loan in the event of nonpayment by the recipient (involving
payments in cash or in kind), or indirectly through any other obligation of the
government or the NBT or any other agency acting on behalf of the government to
finance a shortfall incurred by the loan recipient.

22. Concessionality
will be based on currency-specific discount rates based on the OECD commercial
interest reference rates (CIRRs). For loans of an original maturity of at least
15 years, the average of CIRRs over the last 10 years will be used as
the discount rate for assessing the concessionality of these loans, while the
average of CIRRs of the preceding six-month period will be used to assess the
concessionality of loans with original maturities of less than 15 years. To the
ten-year and six month averages of CIRRs, the following margins will be added:
0.75 percent for repayment periods of less than 15 years; 1 percent
for 15-19 years; 1.15 percent for 20-30 years; and 1.25 percent
for over 29 years. Under this definition of concessionality, only loans with grant
element equivalent to 35 percent or more will be excluded from the debt limits.

II. Continuous Quarterly Targets

A.
No Directed Credits by the NBT

23. The NBT will not issue any directed
credits. These involve credits that are issued in the absence of a competitive
auction or on non-market terms and conditions. This requirement will be monitored
on the basis of changes in the NBT's balance sheets supported by the NBT's regular
reporting on the results of its credit auctions, including interest rates, and
amounts bid and received.

B. No Non-Core Activities of
the NBT and no Dividend Payments by the NBT

24. The NBT will not make
any expenditures not related to its core business activities or pay dividends
while it has negative net worth.

C. No New External Payments
Arrears

25. No new external payments arrears shall be accumulated at
any time under the PRGF arrangement, excluding those which are subject to negotiation
among creditors. External payments arrears are defined as overdue debt service
arising in respect of obligations incurred directly, guaranteed, or converted
into interstate debt by the government of Tajikistan or the NBT, including penalties
or interest charges.

D. Exchange and Payments Arrangements

26.
Over the next six months, the Republic of Tajikistan will not: (i) impose or intensify
restrictions on the making of payments and transfers for current international
transactions; (ii) introduce or modify multiple currency practices; (iii) conclude
bilateral payments agreements which are inconsistent with Article VIII of the
IMF's Articles of Agreement; or (iv) impose or intensify import restrictions for
balance of payments reasons.

E. No Expenditure Arrears
of the General Government

and of the Social Protection
Fund

27. No new arrears of the general government on wages and of the
Social Protection Fund on transfer payments to its regional offices shall be accumulated
at any time under the PRGF arrangement.

28. For purposes of the performance
criterion, expenditure arrears shall be defined as any shortfall in monthly disbursements
on wages and in transfers from the Social Protection Fund to its regional offices
related to the planned payments. A monthly disbursement plan will be presented
to the Fund staff by the 15th day of the month preceding the month
of actual wage and pension payments.

29. To permit monitoring as defined
above, the government will provide data on actual wage payments and on transfers
from the Social Protection Fund to its regional offices to the IMF staff in the
form of treasury reports and statements from the Social Protection Fund on a monthly
basis no later than 14 days after the end of each month.

III.
Quarterly Indicative Target

A. Reserve Money

Table 7. Indicative Limits on the
Stock of Reserve Money of the NBT

(In
millions of somoni)

December 31, 2002

165.1

March 31, 2003

165.8

June 30, 2003

173.2

September 30, 2003

182.6

Definition

30.
Somoni reserve money of the NBT is defined as the sum of: (i) domestic currency
issued by the NBT; (ii) deposits of commercial banks and other financial institutions
held with the NBT; and (iii) deposit liabilities of the NBT with respect to the
public. Deposits of the general government are excluded from reserve money, but
are included under NDA. NBT reserve money liabilities with respect to commercial
banks and other financial institutions comprise all deposits held by these institutions
at the NBT, including required reserves and excess reserves held in the correspondent
accounts, but excluding NBT liabilities held by commercial banks and other financial
institutions in the form of short term NBT notes. Deposit liabilities of the NBT
to the public include all deposits placed at the NBT, in domestic or foreign currency,
by the nonbank public.

1Quantitative
targets for September 2002 to March 2003 are based on a program exchange rate
of SM 3.0 = US$1 and SDR 1 = US$1.299. Quantitative targets for June to December
2003 are based on a program exchange rate of SM 3.0 = US$1 and SDR 1 = US$1.333,
unless otherwise indicated.2The
change in net credit to general government in the NBT balance sheet may differ
from the change in NBT net claims (transactions) on the general government shown
in the fiscal accounts because the NBT balance sheet revalues the stocks of the
net general government according to the program exchange rate.